1. Problem statement
The authors’ main focus is the sensitivity of CEO wealth to stock return volatility (vega). They find that the higher vega leads to riskier policies made by managers. Examples of risky policies are investment in research and development and high leverage. It indicates that vega is an incentive for executives to invest in riskier asset and more aggressive debt policy. Therefore, firms with high growth opportunities may want to increase vega to motivate managers to invest in high risk with positive NPV projects.
Another focus of this journal is the sensitivity of CEO wealth to stock price (delta). Equity-based compensation has grown so rapidly in recent years and raised delta. Delta is believed to align the interest of managers and shareholders because higher delta means that managers have to work harder to increase the share price so that their wealth also increases. By having a high delta, managers are exposed to more risk. Hence, managers may give up high NPV project if it is very risky. However, higher vega may offset the risk-aversion arise from high delta.
Based on this background, the authors’ main research question is whether higher vega leads to riskier investment and debt policy, and greater volatility of stock returns. The authors want to separate two opposite effects of vega and delta which are (1) the effect of compensation to investment and risk policy, and (2) the effect of those policies to the compensation of risk-averse manager.
Motivation & Literature Study
The theory behind this journal is the convex payoff theory which stated that manager’s pay is a convex function of profits if recipients get a greater increment in pay when returns are high. In order to get greater pay, managers will adopt...
... middle of paper ...
... vega put their investment from less risky capital expenditures to more risky R&D.
Since diversification decreases firm risk, it can be expected that higher vega will result in increased focus of the firm and hence less diversification. This hypothesis is supported by the regression results which indicate positive correlation between vega and Herfindahl Index, and negative correlation between vega and number of segments.
The hypothesis for the correlation between leverage and vega is that firm risk will increase if it has a high leverage. In observing the correlation between leverage and vega, the authors used book leverage as dependent variable because market leverage may fluctuate because of changes in stock performance rather than active managerial decision. The regression results are consistent with the hypothesis since leverage has positive relation with vega.
Troy, PhD., Leo. Almanac of Business and Industrial Financial Ratios. 32nd edt. (2001) (page 159) Paramus, NJ: Prentice Hall.
In order to make inferences about a company’s financial condition, its operations, and its attractiveness as an investment we have analyzed financial ratios and compare ratios derived from SVU’s financial statements (see chart 1).
Agency problem generally arises due to conflicting priorities and preferences of internal corporate managers and external shareholders while deciding between cash dividends or reinvesting options resulting into agency costs. “Agency costs are the costs incurred or opportunities lost by the shareholders of a company when the interest of management is placed before the interest of the shareholders (Robbins et al., 2005 p. 20).” Historically Linear Technologies (LT) does not seem to have Agency problem, and CEO has his shares and stock options with market worth of approximately $47 million reflects long-term commitment. LT can potentially face the agency problem in the future owing to company’s conservative approach of managing its huge cash(cash equivalent) balance of $1.5 billion. LT invests its 1.5 billion cash balance in low risk, low-reward short-term debt securities (p.3) that has earned mere $52 million in the interest payment in year 2002. Investors on the other hand might prefer for LT to invest this cash balance in R&D to innovate the product-line and/or synergetic acquisitions that can increase
Bolton, P., Mehran, H. and Shapiro, J. (2010): "Executive Compensation and Risk Taking”. Retrieved Feb 11, 2011 from http://www.newyorkfed.org/research/staff_reports/sr456.pdf
...ative aspects of diversification, for example through better corporate planning, human recourse management and reaching further synergies between its various business lines.
Is The Tyranny Of Shareholder Value Finally Ending? N.p., n.d. Web. The Web.
CEO compensation has been a heated debate for many years recently, and it can be argued that they are either overpaid or that there payment is justified by the amount of work they do and their performance. To answer the question about whether CEO compensation is justified it must be looked at by the utilitarian viewpoint where the good of many outweighs the good of one. It is true that many CEO’s are paid an exorbitant amount of money; however, their payment is justified by the amount of money that they bring back to the company and the shareholders. There are many factors that impact the pay that the CEO receives according to Shah et.al CEO compensation relies on more than just the performance of the CEO, there are a number of factors that play a rule in the compensation of the CEO including the fellow people who help govern the corporation (Board of Directors, Audit Committee), the size of the company, and the performance that the CEO accomplishes (2009). In this paper the focus will be on the performace aspect of the CEO.
Since the beginning of time, there's been a over dweller, a monarch, a king, a CEO. A higher power has always been a factor in every corporation. CEOs are today's high archey in the business world; a chief executive officer is the highest rank in a company ultimately responsible for managerial decisions. Often given the highest salary you can imagine; a CEO receives their compensation from a variety of sources, such as their base salary, bonuses, benefits, and long term incentives (Walsh). Although legal statements of disclosure remain in dispute, the pay disparity between CEOs and employees has drawn significant attention from the media and has created numerous statistics and charts, such as, in his article The CEO Backlash,
A number of motivational theories explain how rewards affect the behavior of individuals and teams. Performance related pay can have a motivational effect. Employees are motivated to increase prod...
Loos, N. (2006). Value creation in leveraged buyouts: Analysis of factors driving private equity investment performance. Wiesbaden: Deutscher Universitäts Verlag.
...e “ The reward system of the organisation guides the actions that generally have the greatest impact on the motivation and performance of individual employees”. Similarly, Wah (2000) argues that companies which treat their high-performing employees significantly better than those that don't are the best-performing companies around and they reside in the upper quartile of shareholder returns. In addition Lawler (as cited in, Readings In Contemporary Employment Relations, 1998) states that if all the psychological rewards are removed employees will grudgingly remain at work, however if all the financial rewards are removed they would most likely leave.
Managers are encouraged to act more in the interest of shareholders and the amount of leverage in the capital structure affects firm profitability (Ebaid, 2009).
Employee compensation and reward systems have undergone a couple of paradigm shifts since inception. Reward systems were traditionally compensation based and focused on the individual or the position (Beam 1995). After a recession in the early 1980's, employers turned to performance based models in an attempt to save money while still rewarding top performers (Applebaum & Shapiro, 1992). Today, the most successful organizations are using a total reward model, a hybrid of the performance based model combined with strategic human resource management planning to create reward systems that both benefit the employee and help organizations realize their operational goals (Chen & Hsieh, 2006).
In addition, a function of the size of the shareholdings in the company may also have the ability to influence ...
Management spends a huge amount of time to design incentive systems and schemes to motivate their workers and to ensure they work in their best possible manner. Motivating workers by giving them decent pay helps in winning employees heart to make the work done efficiently, significantly and effectively. The most effective way to motivate people to work productively is through individual incentive compensation (Pfeffer, 1998). An attraction of getting more is a powerful incentive to people for high performance. While most people agree that money plays a major role in motivating people, in organizations there is a widespread belief that money may also have some undesirable effects on morale.